9/6/23, 10:23 AM Unveiling the relationship between ownership structure and sustainability performance: Evidence from Indian acquirers

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Journal of Cleaner Production

Volume 413, 10 August 2023, 137039

Unveiling the relationship between ownership structure and sustainability

performance: Evidence from Indian acquirers
Sheeba Kapil , Sarika Kumar

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Abstract

Sustainability goals are a new trend among corporates as they play a significant role in attracting additional
investments for entities that follow sustainability practices. The relationship between a corporate board's composition
and the firm's performance has been well studied in the literature. However, the relationship between a firm's
ownership structure and the firm's sustainability performance remains to be empirically unidentified for firms
participating in mergers and acquisitions (M&As) as M&As lead to major board restructurings. Therefore, we
considered Indian listed M&A-participating firms for the period 2013–2022 and the results reveal a positive
association between institutional and foreign ownership and firms' sustainability performance, whereas promoters'
ownership is negatively related. This study contributes to the literature on corporate governance and M&A by
demonstrating that a corporate board's attributes affect the firm's sustainability performance.

Introduction

Environmental, social, and governance (ESG) is all about firms' business activities that affect the environment and
society in maintaining ‘business viability’ (Gungor and Dincel, 2018; Aras and Crowther, 2016). The process of business
integration with other developed economies has propelled the significance of sustainability performance (measured
as an ESG index score) in developing economies. Sustainability performance has drawn stakeholders' attention to how
firms consider ESG reporting (Kapil and Kumar, 2021). This has pressured firms in different sectors to seriously adopt
sustainability reporting (Khan et al., 2021). Tampakoudis et al. (2021) highlighted that ESG disclosure practices also
impacted synergy gains in mergers and acquisitions (M&As). Researchers are upgrading the available literature on
sustainability by focusing on various firm-specific variables that affect firms' ESG disclosure practices. Alshbili et al.
(2020) and Tampakoudis et al. (2021) highlight that ‘the level of sustainability performance disclosure is largely
determined by the manner in which the organization is governed’.

There is a vast literature on corporate governance (CG); one strand investigates the relationship between a few CG
attributes and firm performance (Mishra and Kapil, 2017; Rani et al., 2014). Another strand of the CG literature
emphasises the CG mechanism that enhances transparency in a firm's operations and leads to better disclosure
practices (Crifo et al., 2019); therefore, it highlights the relationship between CG disclosure practice and M&A
performance (Rani et al., 2013; Masulis and Mobbs, 2014; Tampakoudis et al., 2018). Shamil et al. (2014) point out the
critical role of CG in firms' adoption of ESG reporting. Tampakoudis et al. (2021) analysed a sample of European
countries and highlighted the positive association between ESG scores and the M&A deal premium. Target firms with

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9/6/23, 10:23 AM Unveiling the relationship between ownership structure and sustainability performance: Evidence from Indian acquirers - ScienceDirect

higher ESG scores benefit in the deal process. De Andres and Vallelado (2008) stressed that CG attributes significantly
influenced a firm's socially responsible behaviour in an M&A. A few studies consider the relationship between board
composition and ESG. considered a sample from the Asia pacific region.

M&A activities lead to a major restructuring of a corporate board and significantly affect the decision-making process
(Barros et al., 2022). An M&A directly impacts a firm's operational nature, which significantly alters the firm's
relationship with its stakeholders (who seek to maximise their investments) (Naciti, 2019). The concerns about a
firm's ESG scores are not confined to stakeholders; acquirers also focus on their target's ESG scores and socially
responsible behaviour (Barros et al., 2022Amran et al. (2014)). Caiazza et al. (2021) highlighted the concerns of
acquirers, who must consider potential risks while processing an M&A transaction because the target firm's ESG score
may reflect its financial position and reputation (Barros et al., 2022). Moreover, because CG is responsible for crafting
and executing a firm's strategies for sustainability and protecting its shareholders' interests, the board's composition
and commitment are important to inculcate a culture of sustainability within the firm. However, sustainability
reporting remains in its initial formative stage in India (Kapil and Kumar, 2021). Based on the available literature, the
question arises: Do the board composition and ownership structure of Indian acquirers have any impact on their ESG
reporting and profitability?

The author is motivated by several reasons in choosing India for the study. India is among the fastest growing
economies globally and has taken several significant steps to promote companies' corporate sustainability and
sustainability reporting. In 2011, the Ministry of Corporate Affairs, Government of India (MCA, GOI) introduced
national voluntary guidelines (NVGs) for firms to adopt corporate social responsibility (CSR). Thereafter, the Securities
Exchange Board of India (SEBI) made the Business Responsibility Report (BRR) mandatory for the top 100 Indian NSE
or BSE listed firms. India is among the first countries to make the CSR rule mandatory for firms in section 135 of the
Companies Company act, 2013. De Andres and Vallelado (2008) highlighted that such initiatives had significantly and
positively affected sustainability-disclosure activities in India.

Theoretically, the study draws on the stakeholder, legitimacy, and agency theories, with the following objectives: first,
to analyse the influence of some CG attributes (board size, board independence, and board meetings) and the
composition of ownership structure on acquiring firms’ ESG score. Second, this study can contribute to sustainability-
performance disclosure practices. Furthermore, this study elaborates on the development of the link between CG
attributes and ESG. Third, the study aims to highlight the significant impact of various ownership structures on the
ESG scores of acquiring firms that are involved in M&A activities to realise synergy gains.

This study is the first to contribute to the literature by simultaneously and empirically investigating three types of
ownership variables and other CG attributes in relation to firms’ performance measures and sustainability
performance in the context of a developing country such as India, which is also the second-largest foreign-funded
recipient on the list of developing nations. The remainder of the paper is organised as follows: The next section
presents the theoretical underpinnings of sustainable performance, ownership structure, and other CG attributes
considered for the study and develops the required hypotheses. In the third section, the author presents the data and
methodology employed. The fourth section discusses the results and findings, followed by the last section, which
concludes with implications.

Section snippets

Theoretical unpinning and hypothesis development

The goals for the next few decades are to boost the business world and simultaneously emphasise sustainability. Some
studies (Naciti, 2019; Kapil and Kumar, 2021) have pointed out that the pursuit of sustainable development and
consideration of ESG dimensions will certainly benefit all existing business sectors of the economy by creating new
opportunities and strengthening the relationships with firms' stakeholders. Barros et al. (2022) observed that M&A
activities positively impacted the ESG…

Data

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9/6/23, 10:23 AM Unveiling the relationship between ownership structure and sustainability performance: Evidence from Indian acquirers - ScienceDirect

Data on CG ownership variables, the number of board members, number of independent directors, and number of
board meetings attended by directors (variables mentioned in Table 1) were collected from Prowess IQ, maintained by
CMIE, while firm-performance measures were obtained from EMIS for the NSE listed non-financial firms participating
in M&As for 10 years, i.e. 2013-2022. The firms' ESG scores were collected from the Bloomberg terminal and
companies’ individual sustainability-disclosure…

Conclusion

Sustainability is a critical part of the strategic vision that drives socially and environmentally conscious firms.
Sustainability performance is thus a varied, intricate, and complicated field. Therefore, a firm's sustainability
performance has achieved relevance among researchers. This study provides insights into the relationship between
CG attributes and ESG for M&A Indian acquirers. We investigated 325 acquirers for the period 2013–2022 using a large
panel-data set across various sectors.…

CRediT authorship contribution statement

Sheeba Kapil: Conceptualization, Methodology, Investigation, Resources, Writing – review & editing, Supervision.
Sarika Kumar: Methodology, Software, Validation, Formal analysis, Data curation, Writing – original draft,
Visualization.…

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have
appeared to influence the work reported in this paper.…

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